Tax rates are an important part of any online gaming regulatory model. Some politicians see online gaming as a way to generate instant tax revenue from an activity that already occurs without any oversight.

While it is true that online gaming can bring revenue to governments without having to directly raise individual taxes, the rate is something that must be seriously considered in any discussion about the sustainability of the market.

Pennsylvania’sSB 900 proposes a 54 percent tax rate for regulated online gambling. This would be the highest online gaming tax rate in the world for regulated commercial online gambling.

It would create several issues that would make the operating environment very challenging.

Pennsylvania gaming returns already among the worst for consumers

It is no secret that a business passes on the cost of high tax rates and expensive regulations to its customers. The gaming industry is no different.

The 54 percent tax rate in SB 900 mirrors that of slots and video poker in Pennsylvania. It is no coincidence that the returns on slots and video poker at Pennsylvania are far below what is spread in Nevada and Atlantic City.

The house edge on Pennsylvania slots was 51 percent higher than Nevada.

Even the Las Vegas Strip, where gamblers frequently complain about tight machines, returns 35 percent more than the similar games in Pennsylvania.

The returns posted in all states in the Post-Gazette report include video poker and slots. The return on a slot machine is not easy for a player to determine.

On the other hand, a player can look at a video poker pay table and immediately compute the return.

VPFree2 publishes the returns of the best video poker in each casino market. Out of the 12 casinos in Pennsylvania listed at VPFree2, only three offer a video poker game that returns 99 percent or more.

Only Harrah’s Chester offers one of these games with a minimum bet below $5. Of the four casinos that offer 98 percent video poker, three require a $5 minimum bet, while the other requires a $25 wager.

The other five casinos offer no games higher than 98 percent.

What Delaware and New Jersey do

Online casinos in Pennsylvania could also be forced to lower video poker returns to players to help pay for the extraordinary tax rate.

The 15 percent tax rate in New Jersey helped keep the returns on video poker above 99 percent on most games.

The only table games are blackjack and roulette, neither of which requires royalty licensing. None of the slots are ones that are found in live casinos.

This lack of selection and refreshing of games offered could be a symptom of the lack of profitability in Delaware. Royalties cannot be paid to game providers if revenue is $0.

Pennsylvania casinos would need to partner with software providers as none currently own platforms.

A 54 percent tax rate would only leave 46 percent to split between:

Casino.

Software provider.

Expenses related to hosting the games.

While the same burden applies to live casinos in Pennsylvania, these businesses provide food, drinks, and in some cases horse racing and hotels to generate revenue beyond the casino floor. Pennsylvania online gaming would not enjoy the same diversification opportunity.

Poker would be afflicted with a similar fate

Poker would also suffer from a high tax rate.

The difference between Nevada and New Jersey can already be seen in an online poker comparison. WSOP.com rakes five percent of the pot in its games, while it takes 5.5 percent in New Jersey.

The rake caps are also higher in New Jersey. The VIP program returns as much as double in Nevada compared to New Jersey.

The Nevada online poker tax rate is 6.75 percent. New Jersey taxes interactive gaming at a rate of 17.5 percent when including the 2.5 percent that goes towards the Casino Reinvestment Development Authority.

Astronomical taxes can also be attributed to high rake in regulated countries. PokerStars rakes 6.5 percent at most limits in France. The rake cap is €3 in most cash games, even at many micro limits. The tax rate in France is 46 percent.

This level of rake is unbeatable for virtually all players. Players will lose much faster than they are accustomed. This will create a high churn rate. The high tax rate will leave little for marketing.

The low player retention rate and high cost of acquisition compared to net revenue will make it very challenging for Pennsylvania online poker sites to subsist, let alone profit.

Unlicensed sites won’t lose their appeal

While some unlicensed online poker rooms and casinos may leave Pennsylvania if regulation occurs, some will not. These sites will offer a great value compared to the games operators in Pennsylvania could be forced to offer under a 54 percent tax rate.

This could create unfair competition, something well-written regulations and a reasonable tax rate could avoid.

There is no shame in generating tax revenue from online gaming regulation. It is easy to think that placing a high tax on an activity that creates a new market is the solution.

It will be much better for the industry to use a proper tax rate from the start as opposed to trying to fix it after players have already been churned out of the system due to high fees and house edges.

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John Mehaffey -
John is a writer for multiple online poker publications and is the author of the popular Online Poker Payment Processing Report. Read more from John by following @John_Mehaffey on Twitter.